Wednesday, November 23, 2011

Arkansas Mortgage Mess

Mortgage Foreclosure problems are cropping up in numbers worth reporting in Arkansas now according to this story by Ethan Nobles, with First Arkansas News. The particulars are peculiar to Arkansas but the general notion of bankers and their representatives flouting the laws of the land are not unhappily. And guess what? These messes are screwing up titles for new purchasers, a problem that is becoming endemic to the housing industry.

A Chapter 13 bankruptcy case in the Eastern District of Arkansas, Jonesboro Division, has caused title companies in the state to investigate foreclosure sales to determine if the properties were properly taken back by lenders.

In a Sept. 29 decision, the court held that a lender not authorized to do business in the state of Arkansas was not in compliance with the state’s non-judicial foreclosure laws. That case, In Re Johnson, concerned objections filed by J.P. Morgan Chase Bank and the related Chase Home Finance regarding the confirmation of three Chapter 13 plans for debtors who had lost their homes to the lenders through non-judicial foreclosure proceedings.

The non-judicial foreclosure has become the preferred method for taking back homes from debtors who have defaulted on mortgages. It is an abbreviated process that is less expensive than a traditional judicial foreclosure proceeding that is litigated in the courts system.

J.P. Morgan, in the In Re Johnson case, objected to the Chapter 13 plans of which the debtors sought court approval. A Chapter 13 bankruptcy plan is designed to pay creditors at least a percentage of what they are owed by the debtors over a period of years. J.P. Morgan argued that it was owed the costs and fees it had incurred through the non-judicial foreclosure proceedings and those were not considered in the plans.

The court sided with the debtors, stating J.P. Morgan was not in compliance with Arkansas’ non-judicial foreclosure statutes as it was not authorized to do business in Arkansas. The court ruled the debtors did not owe the foreclosure fees and costs sought by J.P. Morgan. Furthermore, the court ruled J.P. Morgan owed the debtors’ attorneys fees incurred in litigating the issue.

Meanwhile, Little Rock Realtor Allen Trammel said that — in the past week — two of his clients who purchased homes that had been taken back through the state’s non-judicial foreclosure laws were in limbo. He said the explanation given to him in each instance is that title companies are typically refusing to issue title insurance in those transfers until they can determine whether the homes were taken in compliance with state law.

Bob Balhorn, another Little Rock Realtor, confirmed that the In Re Johnson case has put the brakes on sales of the foreclosed properties at issue.

The issuance of title insurance is, quite often, a prerequisite when property is transferred from one owner to another. When that insurance is not issued, questions arise as to validity of the transaction — can the seller make a valid transfer to the property that will not be challenged by another party in the future?

A First Arkansas News reader who requested anonymity stated his family has purchased a home in the state that was taken through a non-judicial foreclosure proceeding. The reader reported that the sale has been put on hold due to concern over the validity of the foreclosure and there is no clear indication as to when the transaction will close.

Megan Skarda, an escrow officer with Associates Closing & Title in Little Rock, addressed the issue in a letter sent out on Oct. 21 to companies and individuals involved in the sales of homes taken through non-judicial foreclosure.

“As I am sure you all have encountered recently, a decision with the bankruptcy court has caused us to do a lot of new research on non-judicial foreclosed properties that are currently under (sales) contract(s),” Skarda stated in the letter, adding her company is trying to decide if those properties have been taken in compliance with state law.

In cases where lenders were not authorized to do business in Arkansas, Skarda said it may be necessary for those organizations to take the properties through traditional, judicial foreclosures.

Skarda attached to the letter a opinion from her company’s attorneys. Those attorneys are not identified in the letter, but their comments do shed some light on what a lender must do to be authorized to do business in Arkansas, clarify the ramifications of the bankruptcy case and raise the possibility of an appeal. The complete and verbatim advise from those lawyers is as follows:
Two weeks ago an Opinion and Order was rendered in the Eastern District of Arkansas Bankruptcy Court. Said Order was issued to resolve three Objection to Confirmation hearings wherein the facts and arguments were all the same. Briefly stated the Judge determined that entities that wish to avail themselves of the Arkansas Statutory Foreclosure Act (ASFA) i.e. foreclose property non-judicially, must be registered with the Arkansas Secretary of State for the foreclosure to be valid. The Order disallowed the inclusion of foreclosure fees in the debtor’s plan. The fallout from this Order is that national title insurance underwriters are declining to insure the validity of title following a non-judicial foreclosure when the entity seeking relief is not registered with the Arkansas Secretary of State or the Arkansas State Banking Department.

We are working diligently with title underwriters, the Secretary of State, state legal authorities, and the law firm mounting an appeal of what we believe is a clearly erroneous order. Notices will be generated on all new Arkansas referrals when the entity seeking or having obtained foreclosure falls into this category. We will be updating you as the matter goes forward; however we will need your direction as to how you wish to proceed with each file.

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